Note 3. Stock-Based Compensation

Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the grant).

Our net loss for the six month periods ended March 31, 2015 and March 31, 2014 includes $153,000 and $64,000, respectively, of compensation costs related to our stock-based compensation arrangements.

Stock Option awards

The Company measures the compensation cost associated with stock option awards by estimating the fair value of the award as of the grant date using the Black-Scholes pricing model. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company's stock options and stock awards granted during fiscal 2014 and 2015. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards.

During the six months ended March 31, 2015, the Company granted a total of 80,871 non-statutory stock options and a total of 103,955 incentive stock options all with an exercise price of $7.79 and per-share weighted average fair value of $5.85.

During the six months ended March 31, 2014 the Company granted 89,500 incentive stock options from available shares under its 2008 Plan, as amended, with an exercise price of $2.48 and a per-share weighted average fair value of $2.12.

In addition to the exercise and grant date prices of the stock option awards, certain weighted average assumptions that were used to estimate the fair value of stock option grants are listed in the following table:

	Fiscal 2015 Incentive Stock Options			Fiscal 2015 Non-Statutory Stock Options			Fiscal 2014 Incentive Stock Options
Expected term (years)		6.5			6.5			6.5
Expected volatility		87.40	%		87.40	%		112.11	%
Risk-free interest rate		1.85	%		1.85	%		1.94	%
Expected dividends		0			0			0

We estimate expected volatility based on historical weekly price changes of our common stock for a period equal to the current expected term of the options. The risk-free interest rate is based on the United States treasury yields in effect at the time of grant corresponding with the expected term of the options. The expected option term is the number of years we estimate that options will be outstanding prior to exercise considering vesting schedules and our historical exercise patterns.

The following table summarizes stock option activity for the six month period ended March 31, 2015 under all plans:

	Shares			Weighted Average Exercise Price		Weighted Avg. Remaining Contractual Life (Yrs.)
Outstanding-beg of year		396,910		$	3.87
Options granted		184,826		$	7.79
Options exercised		(22,550	)	$	2.01
Forfeited		0
Expired		(11,853	)	$	9.33
Outstanding Mar 31, 2015		547,333		$	5.15		7.8
Exercisable Mar 31, 2015		162,586		$	5.56		5.0

As of March 31, 2015, the aggregate intrinsic value of the outstanding and exercisable options was $1,584,000 and $623,000, respectively. Only options whose exercise price is below the current market price of the underlying stock are included in the intrinsic value calculation.

As of March 31, 2015, the total remaining unrecognized compensation cost related to non-vested stock options was $1,224,000 and is expected to be recognized over a weighted average period of approximately 2.95 years.

There were 22,548 stock options exercised during the six months ended March 31, 2015 with proceeds of $45,000.

Restricted Stock Grants

During the fiscal year 2014, the Company issued 123,840 shares of restricted stock to certain employees and executive officers from available shares under its 2008 Plan, as amended. The shares were issued with a grant date fair market value of $3.23 which is equal to the closing price of the stock on the date of the grants. The restricted stock grant vests three years following the grant date.

A summary of the status of non-vested restricted stock as of March 31, 2015 is presented below.

	Shares		Weighted Average Grant Date Fair Value Per Share
Non-vested shares at beg of year		123,840	$	3.23
Granted		0
Vested		0
Non-vested shares at Mar 31, 2015		123,840	$	3.23

As of March 31, 2015, there was $304,000 of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a weighted average period of approximately 2.31 years.